ANALYSIS OF FINANCIAL MANAGEMENT PRACTICES ON …

International Journal of Economics, Commerce and Management

United Kingdom

Vol. IV, Issue 4, April 2016



ISSN 2348 0386

ANALYSIS OF FINANCIAL MANAGEMENT PRACTICES ON EFFECTIVE USE OF PUBLIC FUNDS IN THE COUNTY GOVERNMENT OF NAKURU, KENYA

J. M. Wang'ombe School of Business, Jomo Kenyatta University of Agriculture and Technology, Kenya

janetmuthoni218@

P. Kibati School of Business, Jomo Kenyatta University of Agriculture and Technology, Kenya

kibatip@

Abstract In the recent past, Kenya has experienced challenges in efficient utilization and management of public funds in government institutions. The County Government of Nakuru is one of the counties cited to have poorly managed its public funds characterized by high recurrent expenditure and low development expenditure. This study analyzed financial management practices affecting effective use of public funds in the county government of Nakuru. The study specifically examined the implication of records management and internal monitoring on effective use of public funds. The study adopted explanatory research design and it was conducted in the Nakuru County Government's Treasury targeting the 293 staffs involved in the management of finances. A sample of 74 staffs was selected to participate in the study using stratified random sampling technique. Data were then collected using questionnaires administered to the respondents. Data collected were analyzed using descriptive and Inferential statistics. The study revealed that records management practices did not have significant effect on utilization of County Government funds. However, internal monitoring and controls significantly influenced the effective use of funds in the County Government. The study concluded that financial practices in the county government were responsible for the funds utilization. As a result, the study recommended that County Governments as well as the national treasury should enhance internal monitoring and controls. Keywords: County Government, Financial Management Practices, Internal Monitoring and Controls, Public Funds, Records Management

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INTRODUCTION Public financial management is critical to improving the quality of public service outcomes. Public financial management is defined by The Chartered Institute of Public Finance and Accountancy (CIPFA, 2010) as "the system by which financial management resources are planned, directed and controlled to enable and influence the efficient and effective delivery of public service goals. It affects how funding is used to address national and local priorities, the availability of resources for investment and the cost-effectiveness of public services. It is more than likely that the general public will have greater trust in public sector organizations if there is strong financial stewardship, accountability and transparency in the use of public funds (International Federation of Accountants (IFAC, 2012).

The World Bank (2009) has emphasized the need to develop and strengthen the finance profession in developing and emerging economies to achieve stable and stronger financial management. According to OECD (2011) for effective public finance management, countries should build and maintain competent managerial and technical staff capacities, including but not limited to professional accountants and auditors, with the knowledge and skills to sustain PFM reforms at different levels of government including at sector level. Further, governments should improve fiscal transparency through mechanisms to ensure that meaningful public budget and financial information at different stages of the budget cycle is accessible to the public, with due attention to quality, usefulness, accessibility and timeliness. Pretorius and Pretorius (2008) indicate that effective Public Finance Management (PFM) systems maximize financial efficiency, improve transparency and accountability, and contribute to long term economic success.

In developing economies, public sector finance reforms have been based on various platforms. In Cambodia, Sierra Leone and Kosovo a sequenced approach to PFM reform was agreed and implemented in the most credible way. This approach prioritizes PFM reform interventions that address efficiency and accountability first. Then, further sequencing of reform interventions focuses on a joint problem identification by government and donors (World Bank, 2012). In Liberia, accounting was improved before embarking on the reform of the budget execution. A single accounting department has been established. Further, a new chart of accounts that is compatible with internationally recognized and regular annual fiscal outturn reports, supplemented by quarterly reports are published on the website of the Ministry of Finance (World Bank, 2012).

The recent move to adopt decentralization has led to a paradigm shift on governance, revenue collection and management. Kenya through the 2010 constitution adopted the devolution system of decentralization. Devolution entails the transfer from the central government to local governments the power to plan, mobilize resources and implement

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development programs (Prud'homme, 2003). The demand for devolution in Kenya arose from persisting perceptions and actual evidence of inequalities across Kenyan regions, which some people linked to the failure of over centralized budgeting and governance (Nyanjom, 2014).

The results of devolution gave birth to 47 county governments each with autonomy to plan, develop budgets, raise funds and deliver services to its citizens. In the devolved system of governance, Revenue is shared by the Commission for Revenue Allocation (CRA) between the central government and the county governments. CRA provides that, 34 per cent of the total revenue be allocated to the county government, 65.5 per cent to the national government and 0.5 per cent be allocated as equalization fund to the deeply marginalized regions. These figures are to be calculated based on the latest audited government accounts (CRA, 2013). The county revenue allocation is then budgeted and appropriated by the county government based on the principles set out in the Public Finance Management (PFM) Act of 2012(ROK, 2012).County governments are required to raise revenues to bridge gaps between the county budgets and the equitable share from the national government. Guidelines on the revenue collection and Budgeting and budget implementation are based on the Public Finance Management Act (PFMA), 2012.

The PFMA 2012 clearly stipulates the principles and framework for public finance management by all government entities. The requirements and principles of public finance stipulated in Article 201 of the Constitution are: openness and accountability, including public participation in financial matters, equity in distribution of resources to ensure that resources are shared between the current and future generations. Further, it requires that public funds are used prudently for the intended purpose and in a responsible manner. Finally, the PFMA 2012 requires that there is clarity in fiscal reporting and responsible financial management. These constitutional principles are further expounded under Section 107of the PFMA, 2012 (ROK, 2012).

The recent move to adopt decentralization has led to a paradigm shift on governance, revenue collection and management. Kenya through the 2010 constitution adopted the devolution system of decentralization. Devolution entails the transfer from the central government to local governments the power to plan, mobilize resources and implement development programs (Prud'homme, 2003). The demand for devolution in Kenya arose from persisting perceptions and actual evidence of inequalities across Kenyan regions, which some people linked to the failure of over centralized budgeting and governance (Nyanjom, 2014).

The PFMA 2012 clearly stipulates the principles and framework for public finance management by all government entities. The requirements and principles of public finance stipulated in Article 201 of the Constitution are: openness and accountability, including public

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participation in financial matters, equity in distribution of resources to ensure that resources are shared between the current and future generations. Further, it requires that public funds are used prudently for the intended purpose and in a responsible manner. Finally, the PFMA 2012 requires that there is clarity in fiscal reporting and responsible financial management. These constitutional principles are further expounded under Section 107of the PFMA, 2012 (ROK, 2012).

In Nakuru County various issues have been cited in regard to public finance management since the inception of the county. The budget implementation report for the financial year 2013/2014 revealed that the county spent 50.42% on personnel emoluments, 40.67% on operations and maintenance while development expenditure formed 8.15%, 0.77% was spent in repayment of debts and pending bills. Nationally within the same period development expenditure was 22.3 per cent of the total county government expenditure (ROK, 2014a). In the first quarter of financial year 2014/2015, the Office of Controller of Budget (OCOB) reported that the county was second among the three counties with the highest spending on recurrent expenditure. The county spent 49.18 per cent on personnel emoluments, 33.81% on operations and maintenance while development took 17.01 per cent of the expenditure for the first quarter (ROK, 2014).

Statement of the Problem The management of finances in County Governments is guided by the PFMA, 2012. Counties are therefore required to ensure, openness, accountability, public participation in financial matters, equity in distribution of resources, prudent use of resources, clarity in fiscal reporting and responsible financial management (ROK, 2012). In effective financial management public institutions are required to ensure allocations are implemented fully and faithfully. In addition, oversight, controls and prudent monitoring are essential to ensure that value-for money is delivered (OECD, 2011). However, in the County Government of Nakuru, absorption of funds for recurrent expenditure has been significantly high above the budgeted amounts while on the other hand absorption of funds in development expenditure fell significantly low (ROK, 2014a). Nakuru County recorded low absorption rates in development expenditure of 0.77 per cent in the financial year 2013/2014 and 17.01 percent in the first quarter of financial year 2014/2015 (ROK, 2014). Reports by the Office of the Auditor General (2015) cited high levels of financial mismanagement characterized by inflated costs, improper allocation of supply contracts, irregular payments and lack of supporting documents on payments. As a result of poor financial management, there is low level of budget absorption especially in development expenditure therefore defeating the very purpose for which it was created for enhancing development at

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grassroots level and bringing public services closer to the citizens. Consequently there is no value for taxpayer's money. Therefore this study sought to analyze finance management practices on effective use of public funds at the County Government of Nakuru.

General Objective The general objective of the study was to analyze finance management practices influencing effective use of public funds in County Government of Nakuru.

Specific Objective i. To assess the effects of records management on effective use of public funds in Nakuru County Government ii. To establish how internal monitoring and controls affects effective use of public funds in Nakuru County Government

Research Hypotheses H01: Records management does not have a significant effect on effective use of public funds at the County Government of Nakuru. H02: Internal monitoring and controls does not have a significant effect on effective use of public funds in County Government of Nakuru.

THEORETICAL REVIEW The big bucket theory in records management and organizational control theory are reviewed in this section.

Big Bucket Theory in Records Management The big bucket theory was originally termed "flexible scheduling" and first proposed by the U.S. National Archives and Records Administration (NARA) (2003), the approach consolidates paper and electronic information into broad categories, or buckets. Rather than following a lengthy checklist, employees classify their records by a handful of groupings. Those groupings may be based on time periods, business functions, legal and regulatory classifications, or whatever makes sense for the organization and complies with appropriate laws.

In theory, the big bucket approach should greatly simplify records retention, thus improving employee compliance and reducing the risk of mismanaged files. And, in practice, it often does just that. But the big buckets do carry some considerations of their own. There is the danger of creating categories that are too broad, which affects accessibility and the volume of

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